Govt bans sugar futures till Dec

ET BureauMay 27, 2009, 12.01am IST

MUMBAI: Barely a week since trading in wheat futures resumed after a gap of more than two years, commodity exchange regulator Forward Markets Commission (FMC) on Tuesday decided to temporarily suspend permission given to exchanges to launch new sugar contracts until December 31.

The ongoing contracts in the commodity will continue to be traded until their expiry. However, no fresh trading positions can be initiated in them. Clients will only be able to square off their existing positions. This means ultimately volumes will drop to zero. The move could hurt many traders in sugar futures.

Sources in the UPA told ET that the decision to suspend sugar futures was taken at the highest level. "The issue was dealt with at the PM's level," a senior political functionary, requesting anonymity, said. What he meant was that the Union agriculture minister Sharad Pawar was informed of the decision only at a later stage. The decision to suspend sugar futures came a day after Mr Pawar told the media that the government was not in a hurry to lift the ban on non-basmati rice exports.

Confirming the suspension, Rajeev Agarwal, member, FMC, said: "Considering the supply-demand scenario and the inflationary expectations in sugar, the regulator has taken this step as an abundant caution. We have not suspended current contracts, but no new positions will be allowed to be taken in them. However, we have suspended permission for all futures contracts in sugar that have yet to be launched till December 31."

Sugar prices have steadily risen on account of an estimated shortage in the current season's production. Against a production of 26.3 million tonnes last year, output this year is estimated at just 14.7 mt. Sugar production has been estimated lower because of lower availability of sugarcane, its diversion to competing sectors such as gur and khandsari and lower recovery. According to the latest government estimate, sugarcane production in the country may go down significantly to 289.2 mt in 2008-09 from 348.2 mt last year.

"Last year, when there was surplus production, the government exported around 4.9 mt of sugar, which, after consumption, left it with a closing stock of 8 mt against 9.2 mt in the previous year. It is patently unfair on the part of anyone to blame the futures markets for the rise in prices, which reflect the underlying supply-demand situation," said a futures broker.

Spot price data on NCDEX, the exchange that will be most affected by the suspension of sugar futures trading, show that price of the sweetener is up by over 50% at Rs 23.95 a kg.

"The announcement could affect the volumes on NCDEX substantially as this a third instance (after grains and pulses) that the market regulator has banned an agri-commodity after a substantial rise in prices," said Atul Shah, Head (commodities), Emkay Commtrade.

"Since a sugar shortage was expected this year, even retail investors who did not have any interest in the physical market, had increased their participation in the futures market. These traders could experience a substantial hit as their open positions will have to be settled at the expiry, while new positions are refrained. Also from the physical side, players who were holding a sell position in the futures market with the actual stock in their hand could try to vend off their inventory. Spot market, in this backdrop could see a sizeable quantity of supply from such traders in coming days," he added.